Predatory Pricing

Adam Rogers' The dirty little secret that could bring down Big Tech is based on work by Matt Wansley and Sam Weinstein of the Cardozo School of Law, who questioned why the investors in companies such as Uber, Lyft, or WeWork would sink:

billions of dollars of capital into a money-losing business where the path to profitability wasn't clear?

The answer is the remarkable effectiveness of predatory pricing at making money for VCs and founders. Rogers writes:

Wansley and Weinstein — who, not coincidentally, used to work in antitrust enforcement at the Justice Department — set out to change that. In a new paper titled "Venture Predation," the two lawyers make a compelling case that the classic model of venture capital — disrupt incumbents, build a scalable platform, move fast, break things — isn't the peak of modern capitalism that Silicon Valley says it is. According to this new thinking, it's anticapitalist. It's illegal. And it should be aggressively prosecuted, to promote free and fair competition in the marketplace.

Below the fold I discuss Wansley and Weinstein's paper and relate it to events in the cryptosphere.

Amazon Is Profitable?

Six years ago, in Two Brief Updates I first wrote about Benedict Evans' insightful analysis of Amazon's financial reports:

He shows how Amazon's strategy is not to generate and distribute profits, but to re-invest their cash flow into staring and developing businesses. Starting each business absorbs cash, but as they develop they turn around and start generating cash that can be used to start the next one.

He is now back with a similarly insightful analysis entitled Amazon's profits, AWS and advertising, which starts:

People argue about Amazon a lot, and one of the most common and long-running arguments is about profits. The sales keep going up, and it takes a larger and larger share of US retail every year (7-8% in 2019), but it never seems to make any money. What’s going on?

Below the fold, some details of Evans' explanation.

Archival Cloud Storage Pricing

Although there are significant technological risks to data stored for the long term, its most important vulnerability is to interruptions in the money supply. The current pandemic is likely to cause archives to suffer significant interruptions in the money supply.

In Cloud For Preservation I described how much of the motivation for using cloud services was their month-by-month pay-for-what-you-use billing, which transforms capital expenditures (CapEx) into operational expenditures (OpEx). Organizations typically find OpEx much easier to justify than CapEx because:

• The numbers they look at are smaller, even if what they add up to over time is greater.
• OpEx is less of a commitment, since it can be decreased if circumstances change.

Unfortunately, the lower the commitment the higher the risk to long-term preservation. Since it doesn't deliver immediate returns, it is likely to be first on the chopping block. Thus both reducing storage cost and increasing its predictability are important for sustainable digital preservation. Below the fold I revisit this issue.

Google's Fenced Garden

In the wake of Lina Khan's masterful January 2017 Yale Law Journal article Amazon's Antitrust Paradox, both anti-trust investigations of the FAANGs and anti-trust remedies have been consuming extraordinary numbers of pixels. Although the investigations cover all the major platforms, the discussion of remedies has tended to focus on Facebook and Amazon. Below the fold, I ask whether, assuming any of the multifarious investigations lead to anything other than cost-of-doing-business fines, any of the proposed remedies would be effective against Google. I apologize for the inordinate length of this post; it seemed that the more I wrote the more there was to write.

Interesting Articles From Usenix

Unless you're a member of Usenix (why aren't you?) you'll have to wait a year to read two of three interesting preservation-related articles in the Fall 2019 issue of ;login:. Below the fold is a little taste of each of them, with links to the full papers if you don't want to wait a year:

The Web Is A Low-Trust Society

Back in 1992 Robert Putnam et al published Making democracy work: civic traditions in modern Italy, contrasting the social structures of Northern and Southern Italy. For historical reasons, the North has a high-trust structure whereas the South has a low-trust structure. The low-trust environment in the South had led to the rise of the Mafia and persistent poor economic performance. Subsequent effects include the rise of Silvio Berlusconi.

Now, in The Internet Has Made Dupes-And Cynics-Of Us All, Zynep Tufecki applies the same analysis to the Web:

ONLINE FAKERY RUNS wide and deep, but you don’t need me to tell you that. New species of digital fraud and deception come to light almost every week, if not every day: Russian bots that pretend to be American humans. American bots that pretend to be human trolls. Even humans that pretend to be bots. Yep, some “intelligent assistants,” promoted as advanced conversational AIs, have turned out to be little more than digital puppets operated by poorly paid people.

The internet was supposed to not only democratize information but also rationalize it—to create markets where impartial metrics would automatically surface the truest ideas and best products, at a vast and incorruptible scale. But deception and corruption, as we’ve all seen by now, scale pretty fantastically too.

Below the fold, some commentary.

The Risks Of Outsourcing

My Cloud for Preservation post was in some sense all about the risks of outsourcing IT infrastructure to the cloud. Below the fold I comment on two recent articles illustrating different aspects of these risks.

Lina M. Khan On Structural Separation

In It's The Enforcement, Stupid! I argued that anti-trust enforcement was viable only if there were "bright lines". I even went further and, following Kim Stanley Robinson's Pacific Edge, suggested a hard cap on corporate revenue, as a way of making anti-trust self-executing.

Much of the recent wave of attention to anti-trust was sparked by Lina Khan's masterful January 2017 Yale Law Journal article Amazon's Antitrust Paradox (a must-read, even at 24,000 words). Now Cory Doctorow writes:

Khan (who is now a Columbia Law fellow) is back with The Separation of Platforms and Commerce -- clocking in at 61,000 words with footnotes! -- that describes the one-two punch of contemporary monopolism, in which Reagan-era deregulation enthusiasts took the brakes off of corporate conduct but said it would be OK because antitrust law would keep things from getting out of control, while Reagan-era antitrust "reformers" (led by Robert Bork and the Chicago School) dismantled antitrust). 

You should definitely read Khan's latest magnum opus. OK, maybe you can skip the footnotes, I admit I did. Below the fold I examine two threads among many in the article.

What is Amazon?

In Why It's Hard To Escape Amazon's Long Reach, Paris Martineau and Louise Matsakis have compiled an amazingly long list of businesses that exist inside Amazon's big tent. After it went up, they had to keep updating it as people pointed out businesses they'd missed. In most of those businesses, Amazon's competitors are at a huge disadvantage:

While its retail business is the most visible to consumers, the cloud computing arm, Amazon Web Services, is the cash cow. AWS has significantly higher profit margins than other parts of the company. In the third quarter, Amazon generated $3.7 billion in operating income (before taxes). More than half of the total, $2.1 billon, came from AWS, on just 12 percent of Amazon’s total revenue. Amazon can use its cloud cash to subsidize the goods it ships to customers, helping to undercut retail competitors who don’t have similar adjunct revenue streams.

In the mid-50s my father wrote a textbook, Organisation of retail distribution, with a second edition in the mid-60s. He would have been fascinated by Amazon. I've written about Amazon from many different viewpoints, including storage as a service, and anti-trust, so I'm fascinated with Amazon, too. Now, when you put recent posts by two different writers together, an extraordinarily interesting picture emerges, not just of Amazon but of the risks inherent to the "friction-free" nature of the Web:

• Zack Kanter's What is Amazon? is easily the most insightful thing I've ever read about Amazon. It starts by examining how Walmart's "slow AI" transformed retail, continues by describing how Amazon transformed Walmart's "slow AI" into one better suited to the Internet, and ends up with a discussion of how Amazon's "slow AI" seems recently to have made a fundamental mistake.
• Izabella Kaminska's series Amazon (sub)Prime? and Amazon (sub)Prime - Part II provides the deep dive to go with Kanter's big picture, looking in detail into one of the many symptoms of the "slow AI's" apparent mistake.

Below the fold, a long meditation on these posts.

It's The Enforcement, Stupid!

Kim Stanley Robinson is a remarkable author. In 1990 he concluded his Wild Shore triptych of novels describing alternate futures for California with Pacific Edge:

Pacific Edge (1990) can be compared to Ernest Callenbach's Ecotopia, and also to Ursula K. Le Guin's The Dispossessed. This book's Californian future is set in the El Modena neighborhood of Orange in 2065. It depicts a realistic utopia as it describes a possible transformation process from our present status, to a more ecologically-focused future.

Why am I writing about this now, nearly three decades later? Follow me below the fold for an explanation.

Irina Bolychevsky on Solid

Although I'm an enthusiast for the idea of a decentralized Web, I've been consistently skeptical that the products proposed to implement it have viable businesses. Two months ago, in How solid is Tim’s plan to redecentralize the web?, Irina Bolychevsky (@redecentralize founder and self-described "product person") made related points. Below the fold, some commentary.

Making PIEs Is Hard

In The Four Most Expensive Words In The English Language I wrote:

Since the key property of a cryptocurrency-based storage service is a lack of trust in the storage providers, Proofs of Space and Time are required. As Bram Cohen has pointed out, this is an extraordinarily difficult problem at the very frontier of research.

The post argues that the economics of decentralized storage services aren't viable, so the difficulty of Proofs of Space and Time isn't that important. All the same, this area of research is fascinating. Now, in One File for the Price of Three: Catching Cheating Servers in Decentralized Storage Networks Ethan Cecchetti, Ian Miers, and Ari Juels have pushed the frontier further out by inventing PIEs. Below the fold, some details.

What Does Data "Durability" Mean

Source

In What Does 11 Nines of Durability Really Mean? David Friend writes:

No amount of nines can prevent data loss.

There is one very important and inconvenient truth about reliability: Two-thirds of all data loss has nothing to do with hardware failure.

The real culprits are a combination of human error, viruses, bugs in application software, and malicious employees or intruders. Almost everyone has accidentally erased or overwritten a file. Even if your cloud storage had one million nines of durability, it can’t protect you from human error.

Friend may be right that these are the top 5 causes of data loss, but over the timescale of preservation as opposed to storage they are far from the only ones. In Requirements for Digital Preservation Systems: A Bottom-Up Approach we listed 13 of them. Below the fold, some discussion of the meaning and usefulness of durability claims.

Triumph Of Greed Over Arithmetic

I discussed FileCoin's ICO in The Four Most Expensive Words in the English Language and worked out that:

Filecoin needs to generate $25.7M/yr over and above what it pays the providers. But it can't charge the customers more than S3, or $0.276/GB/yr. If it didn't pay the providers anything it would need to be storing over 93PB right away to generate a 10% return. That's a lot of storage to expect providers to donate to the system.

On my bike ride this morning I thought of another way of looking at FileCoin's optimistic economics.

FileCoin won't be able, as S3 does, to claim 11 nines of durability and triple redundancy across data centers. So the real competition is S3's Reduced Redundancy Storage, which currently costs $23K/PB/month. Assuming that Amazon continues its historic 15%/year Kryder rate, storing a Petabyte in RRS for a decade is $1.48M. So, if you believe cryptocurrency "prices", FileCoin's "investors" pre-paid $257M for data storage at some undefined time in the future. They could instead have, starting now, stored 174PB in S3's RRS for 10 years. So FileCoin needs to store at least 174PB for 10 years before breaking even.

It gets worse. S3 is by no means the low-cost provider in the storage market. If we assume that the competition is Backblaze's B2 service at $0.06/GB/yr and that their Kryder rate is zero, FileCoin would need to store 428PB for 10 years before breaking even. Nearly half an Exabyte for a decade!

Amazon's Margins Again

AMZN operating margins

I've been pointing out that economies of scale allow for the astonishing margins Amazon enjoys on S3, and the rest of AWS, for six years. Now, This is the Amazon everyone should have feared — and it has nothing to do with its retail business by Jason Del Rey and Rani Molla documents AWS' margins in this table.

Amazon’s $52.9 billion of revenue in the second quarter of the year came in a tad below what Wall Street analysts expected — and that doesn’t matter whatsoever.

That’s because the massive online retailer once again posted its largest quarterly profit in history — $2.5 billion for the quarter — on the back of two businesses that were afterthoughts just a few years ago: Amazon Web Services, its cloud computing unit, as well as its fast-growing advertising business.

Below the fold, I discuss one of the implications of these amazing margins.

It Isn't About The Technology

A year and a half ago I attended Brewster Kahle's Decentralized Web Summit and wrote:

I am working on a post about my reactions to the first two days (I couldn't attend the third) but it requires a good deal of thought, so it'll take a while.

As I recall, I came away from the Summit frustrated. I posted the TL;DR version of the reason half a year ago in Why Is The Web "Centralized"? :

What is the centralization that decentralized Web advocates are reacting against? Clearly, it is the domination of the Web by the FANG (Facebook, Amazon, Netflix, Google) and a few other large companies such as the cable oligopoly.

These companies came to dominate the Web for economic not technological reasons.

Yet the decentralized Web advocates persist in believing that the answer is new technologies, which suffer from the same economic problems as the existing decentralized technologies underlying the "centralized" Web we have. A decentralized technology infrastructure is necessary for a decentralized Web but it isn't sufficient. Absent an understanding of how the rest of the solution is going to work, designing the infrastructure is an academic exercise.

It is finally time for the long-delayed long-form post. I should first reiterate that I'm greatly in favor of the idea of a decentralized Web based on decentralized storage. It would be a much better world if it happened. I'm happy to dream along with my friend Herbert Van de Sompel's richly-deserved Paul Evan Peters award lecture entitled Scholarly Communication: Deconstruct and Decentralize?. He describes a potential future decentralized system of scholarly communication built on existing Web protocols. But even he prefaces the dream with a caveat that the future he describes "will most likely never exist".

I agree with Herbert about the desirability of his vision, but I also agree that it is unlikely. Below the fold I summarize Herbert's vision, then go through a long explanation of why I think he's right about the low likelihood of its coming into existence.

The Box Conspiracy

Growing up in London left me with a life-long interest in the theatre (note the spelling).  Although I greatly appreciate polished productions of classics, such as the Royal National Theatre's 2014 King Lear, my particular interests are:

• Long-form theatre, such as Tony Kushner's 7+ hour Angels in America, Ken Campbell's Science Fiction Theatre of Liverpool's 9-hour Illuminatus Trilogy, or Taylor Mac's 24-hour A 24-Decade History of Popular Music.
• New plays, for which I support San Francisco's Magic Theatre and the Berkeley Repertory Theatre's Ground Floor program.
• Plays that experiment with the form of theatre, such as the Royal National Theatre's London Road and Earthquakes in London.

I've been writing recently about Web advertising, reading Tim Wu's book The Attention Merchants: The Epic Scramble to Get Inside Our Heads, and especially watching Dude, You Broke The Future, Charlie Stross' keynote for the 34th Chaos Communications Congress. As I do so, I can't help remembering a show I saw nearly a quarter of a century ago that fit the last of those categories. Below the fold I pay tribute to the prophetic vision of an under-appreciated show and its author.

Why Is The Web "Centralized"?

There is a groundswell of opinion, which I share, in favor of a "decentralized Web" that has continued after last year's "Decentralized Web Summit". A wealth of different technologies for implementing a decentralized Web are competing for attention. But the basic protocols of the Internet and the Web (IP, TCP, DNS, HTTP, ...) aren't centralized. What is the centralization that decentralized Web advocates are reacting against? Clearly, it is the domination of the Web by the FANG (Facebook, Amazon, Netflix, Google) and a few other large companies such as the cable oligopoly.

These companies came to dominate the Web for economic not technological reasons. The Web, like other technology markets, has very large increasing returns to scale (network effects, duh!). These companies build centralized systems using technology that isn't inherently centralized but which has increasing returns to scale. It is the increasing returns to scale that drive the centralization.

Unless decentralized technologies specifically address the issue of how to avoid increasing returns to scale they will not, of themselves, fix this economic problem. Their increasing returns to scale will drive layering centralized businesses on top of decentralized infrastructure, replicating the problem we face now, just on different infrastructure.

Travels with a Chromebook

Two years ago I wrote A Note Of Thanks as I switched my disposable travel laptop from an Asus Seashell to an Acer C720 Chromebook running Linux. Two years later I'm still traveling with a C720. Below the fold, an update on my experiences.

Lurking Malice in the Cloud

It is often claimed that the cloud is more secure than on-premises IT:

If you ask Greg Arnette if the cloud is more secure than on-premises infrastructure he’ll say “absolutely yes.” Arnette is CTO of cloud archive provider Sonian, which is hosted mostly in AWS’s cloud. The public cloud excels in two critical security areas, Arnette contends: Information resiliency and privacy.

But even if the cloud provider's infrastructure were completely secure, using the cloud does not free the user from all responsibility for security. In Lurking Malice in the Cloud: Understanding and Detecting Cloud Repository as a Malicious Service, a team from Georgia Tech, Indiana U., Bloomington and UCSB report on the alarming results of a survey of the use of cloud services to store malware components. Many of the malware stashes they found were hosted in cloud storage rented by legitimate companies, presumably the result of inadequate attention to security details by those companies. Below the fold, some details and comments.